Saving for your child's
Education
For a lot of us, one of the biggest expenses going
forward is our children's education, even if we don't
choose to use the private school system. If our children
go on to further education, for example university or
TAFE, they will need continued financial support or
will end up with a large debt to pay when they start
working.
We can plan to make this easier for the kids, and for
ourselves if we start saving when they are young. So
what are the options?
Pay as you go education
The default option is just to pay the bills as they
come in, which is what we do now for pre-school. So
there's a peak in the expenses once a term, which always
coincides with paying for swimming lessons and a new
term's 'Hop, skip and jump', or whatever the latest
activity is, and suddenly our bank balance isn't looking
as healthy as it could.
If we go the private school route for senior school,
these peaks are going to be considerable higher, and
even without school fees, there are still expenses each
term to be taken into account.
The other thought for us, and if you're an 'older'
parent you might agree, is that by the time the kids
go to university, we are going to be at that time of
life where we want to slow down, and not work as hard.
(Actually, we'd like to do that right now, but let's
be reasonable!) We want to see the mortgage payments
coming to an end, so we have more cash or we can earn
less money and still have the same lifestyle. If we
send both kids to private school and then help them
through university, we need a better option than pay
as you go.
Education Savings Schemes
There are savings schemes out there that have been
specifically set up for your children's education. The
advantage of these is the tax breaks. Because they are
aimed at education, the Government offers tax concessions
that you cannot get with a standard savings scheme.
An education savings scheme will encourage you to be
disciplined in your saving, and those savings are specifically
for education. Two friendly societies with education
savings schemes are:
Both are allowed by the tax office to rebate all tax
paid on investment earnings at the maturity of the education
savings plan.
If you are interested in these, I would suggest you
meet with them to find out all the details.
We discussed our savings options with ASG, and there
are a couple of things we were previously not aware
of. If our children decide not to go on to further education,
we would get back the money we have paid in, but we
would forfeit the investment earnings. These are returned
to the pool of funds and shared amongst those who do
go on to further education. This is obviously an incentive
to encourage your child to continue their education
in some way, but at the age of 2 or 3 when you might
start saving, it could be hard to judge if this is going
to be the path your child chooses.
Education savings schemes are a relatively conservative
investment option. Look at the rates of return and compare
to your other options. Also check the fees you pay and
be aware of what happens if you have an emergency and
need early access to your savings.
As always, please consult with you financial
advisor before making any investment decisions.
Drawing down on your mortgage to pay
for Education
If we look at this from a purely financial perspective,
then you are better off putting the money you could
save for education into your mortgage and reducing it
as quickly as possible. For example, if a savings plan
offers you 5.8% return, and you are paying 8.8% on your
mortgage, then putting an extra few hundred a month
into your mortgage each month is going to put you in
a better position overall financially. You save paying
8.8% on that money, and you don't pay any extra fees.
The way to do this is to have a flexible mortgage with
a redraw facility, which can be an offset account or
a credit line, for example.
However, if you do this with the thought that when
you need that money for school fees, you will draw down
off your mortgage, then you need to be prepared to see
the mortgage go up as well as down.
An offset account is a good way to reduce your mortgage
as any money in that account is taken off the principle
amount for calculating interest. You could add $500
a month into the offset account which is to be used
for education costs in 7 or 8 years time, but for now
is working for you in your mortgage. You will be able
to see that money easily as the offset account is separate
from the main mortgage, so you can keep track of your
savings. However, you can also access it easily, so
if you are not disciplined in your budget, this may
not be a sensible option. At least if the money goes
to a separate savings scheme, you cannot access it for
day to day spending, and you are encouraged to be disciplined
in your saving.
If you do go down this route, one suggestion is to
keep track of the savings you have put into the mortgage
for education in a separate spreadsheet, so you know
exactly where you stand.
Setting up a savings account or managed
fund for Education
Unfortunately, saving for your child is not as simple
as opening a bank account in their name and adding money
to it. Children are taxed on investment earnings, so
if you put an investment in a child's name and it creeps
over the tax free threshold, they will be taxed at the
high tax rate. This is set up like this to discourage
parents from splitting their income in order to avoid
taxes.
Also, if an account is in a child's name, they officially
have access to it, and may choose not to use this money
for education.
One option is to set up a trust account, where you
hold the investment in your own name in trust. If this
is done, you will incur tax at your own marginal tax
rate. For this reason, it is best to choose the parent
who is on a lower marginal tax bracket as the trustee
for the child's savings.
There are lots of different savings plans out there
such as Exchange Traded Funds or Managed Funds. With
a diversified fund you can spread your risk across fixed
interest, cash, property and shares and hopefully take
advantage of long term growth investments such as property
and shares.
Whatever option you choose for saving, it is worth
doing some research and getting advice as to which is
the best option for you. The one thing that's clear
though, is that the sooner we start saving for education,
the easier things are going to be in the future. We
can still look forward to taking it easy as the kids
get older!
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